Energy Policy in a Small Open Economy. The Case of Sweden

Abstract

In this paper a multisectoral model of economic growth is developed and used for analysis of the economic impact of an energy strategy proposed by the Swedish government. According to the proposal, Sweden should aim at reducing energy consumption growth from a postwar average of 5% per annum to 2% per annum between 1973 and 1985 and to zero growth thereafter. The approach in this study is inspired by Professor Leif Johanson's so-called MSG-model of the Norwegian economy. Here the model has been adapted so as to be useful for analyzing the problems on which this study is focused. Thus the model allows substitution between energy and other factors of production, and it has explicit export and import functions.

The results indicate that for the studied 20-year period, the target energy consumption growth rate can be attained without significant costs in terms of GNP or aggregate household consumption losses. The loss in GNP due to the energy policy was only about 1% at the year 2000. In addition, the energy policy did not lead to significant changes in the sectoral allocation of the labor force. This is because it was primarily capital, available as a result of the reduced growth of the capital-intensive energy sector, that was used as a substitute for energy in the production sectors. However, the negative impact on economic growth increases over time. If the energy consumption is kept at the 1985 level for 5 or 10 more years, the reduction in the rate of economic growth tends to be substantial.

In the model-economy the target energy consumption growth rate was attained by means of a tax on energy consumption. At the year 2000 the tax rate, which kept energy consumption at the target level, varied between 137% and 871%, depending on the assumption made about the elasticity of substitution between energy and composite capital-labor. Energy tax rates of this order of magnitude would obviously create economic incentives for the development of new energy sources and energy conservation methods. It is quite possible that a number of R&D investments in these fields would turn out to have a high rate of return. That is, by means of R&D investments the shape of the production functions would be changed so that the negative impact on economic growth of the energy policy would be mitigated and the tendency towards falling profits counteracted.